ECB cuts key rate to 0.05%

It’s not just what words the Federal Reserve uses or what Fed chief Janet Yellen says about monetary policy that grabs Wall Street’s attention. What the European Central Bank and its top banker Mario Draghi say about the ECB’s next moves to stimulate the Eurozone economy and combat dangerously low inflation also ranks high up on the importance meter.

This morning, the highly anticipated meeting of the ECB takes place, and Wall Street is hoping that the Draghi-led central bank backs up its talk of more stimulus with fresh new programs.

(Breaking News: In a surprise, the ECB lowered its key short-term interest rate this morning to 0.05% from 0.15%. It also slashed the interest rate on deposits further into negative territory, with the rate on deposits being lowered to a negative 0.20%, from -0.10%. A negative interest rate means depositors pay the ECB to hold their cash. It is a move designed by central banks to spur risk-taking and get European consumer banks to lend more readily. The ECB’s move on rates weighed on the euro, which fell to a one-year low of 1.3034 vs. the U.S. dollar. At Draghi’s news conference at 8:30 a.m. ET, the ECB chief also said the ECB will start a bond-buying program focusing on assset-backed securities in an effort to boost growth and boost inflation. This move could be a precursor to full-blown QE, or the ECB purchase of government bonds.)

Ever since Draghi’s speech at Jackson Hole last month, “market expectations are running high again” and markets are “increasingly pricing in further easing of monetary policy,” a trio of economists and central bank watchers at Barclays told clients on the eve of the meeting. In his Jackson Hole speech, Draghi hinted strongly that if inflation continues to fall and the economy continues to slow, a U.S.-style “government bond” buying program might need to be deployed. The Fed, of course, is winding down its third round of bond buying, which includes purchases of U.S. Treasuries. The Fed policy is known as quantitative easing, or QE.

Despite Draghi’s market-friendly talk, however, Wall Street still isn’t sold on the idea that Draghi will pull the trigger and launch QE at Friday’s meeting.

“We don’t think the tipping point has been reached,” Barclays said, adding that the ECB is more likely to announce QE closer to the end of the year or early next year.

Still, even if the ECB doesn’t use the QE card, the view on Wall Street is it will eventually happen. The ECB, however, could announce the start of purchases of asset-backed securities, which it announced in June.

Stocks around the globe, no doubt, will benefit if the ECB surprises and actually announces a full-blown QE, or purchases of government bonds. But even if they don’t, “any disappointment in the markets (will likely) be short-lived,” says Julian Jessop, an economist at Capital Economics. What’s more bold action isn’t expected, nor does anyone think the Eurozone economy will get better any time soon, paving the way for more and bigger stimulus later, adds Jessop.